Report: Slow productivity growth could hamper economy

Productivity gains at U.S. factories have slowed in recent years. (Erik Schelzig, AP)

A new report paints a worrisome picture of the economy’s growth potential, suggesting that a slowdown in productivity gains may be due to long-term structural factors.

The report by Paul Ashworth of Capital Economics cites a fading of information-technology efficiency improvements and the aging of the population as the two main factors suppressing a sharper pickup in productivity.

Productivity is output per labor hour. How quickly the economy can expand depends on the growth of productivity and the number of Americans working.

After surging by more than 3% a year early in the recovery as businesses squeezed more out of fewer workers, productivity has slowed to a 0.5% to 1.5% rate the past few years. Many economists point to a lingering credit crunch that has limited technology investment and the unwillingness of recession-scarred businesses to spend more of their near-record cash reserves on new equipment.

But Ashworth notes that productivity gains actually have been weak for years, slowing to an average 1.6% a year the past decade from 3.1% the previous decade.

The dotcom boom led to soaring productivity in the 1990s. But since the early 2000s dotcom bust, he argues, companies have markedly reduced their technology investments. He cites government data to show that, over the past 14 years, the share of capital stock composed of computers and related equipment has been drifting down and the share made up of software has ticked up modestly.

“The basic problem is that firms haven’t been investing in IT-related capital as quickly as they were during the dotcom boom years,” Ashworth writes.

The other factor, he says, is that Baby Boomers are reaching their 50s and 60s. “Research suggests that individual productivity decreases after the age of 50, as physical and mental abilities decline,” the report says.
Workers age 55 and older now make up 22% of U.S. employment, up from a low of 12% in 1996, according to Capital Economics and the Bureau of Labor statistics.

Like the fall in technology investment, the gradual aging of the work force began in the early 2000s—just when productivity growth started to slow, Ashworth says.

Both factors, he says, could limit economic growth the next few years to as low as 2.2%–similar to the pace at which the economy has expanded so far in the nearly five-year-old recovery.